Here's Why Greatech Technology Berhad (KLSE:GREATEC) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Greatech Technology Berhad (KLSE:GREATEC) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Greatech Technology Berhad

How Much Debt Does Greatech Technology Berhad Carry?

As you can see below, Greatech Technology Berhad had RM13.7m of debt at March 2024, down from RM14.7m a year prior. But it also has RM211.8m in cash to offset that, meaning it has RM198.1m net cash.

A Look At Greatech Technology Berhad's Liabilities

According to the last reported balance sheet, Greatech Technology Berhad had liabilities of RM245.5m due within 12 months, and liabilities of RM27.4m due beyond 12 months. On the other hand, it had cash of RM211.8m and RM252.4m worth of receivables due within a year. So it actually has RM191.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Greatech Technology Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Greatech Technology Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Greatech Technology Berhad grew its EBIT at 16% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Greatech Technology Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Greatech Technology Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Greatech Technology Berhad created free cash flow amounting to 9.2% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Greatech Technology Berhad has net cash of RM198.1m, as well as more liquid assets than liabilities. And we liked the look of last year's 16% year-on-year EBIT growth. So we don't have any problem with Greatech Technology Berhad's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Greatech Technology Berhad , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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